Centronics Corp. v. Genicom Corp.

Supreme Court of New Hampshire · Contracts

ContractsImplied covenant of good faith and fair dealingDiscretion in contractual performanceEscrowArbitrationgood faithfair dealingperformance discretion

Facts

The parties' asset purchase agreement set the purchase price by reference to consolidated closing net book value, with disputes over the closing balance sheet and resulting price to be resolved by a New York accounting firm in binding arbitration. At closing, Genicom paid most of the preliminary price and placed $5 million in escrow; after Centronics delivered a revised balance sheet showing a higher value, Genicom added an adjustment amount to escrow, bringing the fund to $15,867,000. Genicom's accountants then proposed downward adjustments, Centronics objected, and arbitration began. While arbitration was pending, Centronics demanded release of the portion of the escrow fund exceeding Genicom's proposed downward adjustments, but Genicom refused on the ground that the agreement did not allow distribution before final determination of the purchase price.

Issue

Does the implied covenant of good faith and fair dealing require a buyer to consent to a partial interim distribution from an escrow fund during arbitration when the contract expressly provides for final payment after determination of the purchase price? More broadly, can good faith supply a term allowing interim payment when the contract's express provisions govern the timing of distribution?

Rule

Under New Hampshire common law, in cases involving discretion in contractual performance, an implied obligation of good faith arises when an agreement by word or silence gives one party discretion sufficient to deprive the other of a substantial proportion of the contract's value; in that setting, the discretion must be exercised within reasonable limits consistent with the parties' purposes and justified expectations. The court identified four questions for such claims: (1) whether the agreement gives the defendant discretion tantamount to power to deprive the plaintiff of substantial value; (2) whether the parties intended to form an enforceable contract; (3) whether the defendant exceeded reasonable limits in exercising that discretion; and (4) whether the plaintiff's damage was caused by that abuse of discretion rather than by events beyond the defendant's control. But no implied good-faith term can override express and unequivocal contractual provisions fixing the timing of payment and leaving no unilateral discretion to withhold it.

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Maple Ridge Robotics, a seller in Cleveland, transferred manufacturing assets to Harbor Crest Systems under an agreement requiring $8 million of the price to remain in escrow until an accounting referee finally determined any post-closing working-capital dispute. The contract states that final settlement and payment must occur within 7 days after the referee's final determination. During the proceeding, Maple Ridge demanded immediate release of the portion of the escrow exceeding Harbor Crest's claimed downward adjustment, but Harbor Crest refused.

If Maple Ridge sues for breach of the implied covenant of good faith based solely on Harbor Crest's refusal to authorize an interim release, who is most likely to prevail?

Explanation. The majority rule is that good-faith limits on performance discretion apply only when the agreement gives one party practical unilateral power to deprive the other of a substantial portion of the contract's value. Here, the agreement expressly and unequivocally fixes the timing of payment after final determination, so there is no relevant unilateral discretion over timing. A court therefore should not imply a contrary term requiring interim distribution. (Derived from Centronics Corp. v. Genicom Corp. (n.d.).)